Three essays on openness, international pricing, and optimal monetary policy

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Cooper, Russell W., 1955-

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Evans, Richard William, 1975-

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2008-08-29T00:22:29Z

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2008-08-29T00:22:29Z

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2008-05

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b70687055

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http://hdl.handle.net/2152/3962

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text

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The unifying theme of this dissertation is to ask questions about how pricing inefficiencies
and institutional characteristics interact to influence the aggregate real
outcomes of countries in an open economy setting in which each country’s monetary
policy is set optimally. Chapter 1 tries to answer the question of whether openness is
inflationary using a two-country general equilibrium model with optimal monetary
policy that is explicitly derived from microeconomic foundations. Imperfect competition
plays a key role and is modeled as a degree of inelasticity of substitution
among differentiated goods. I find that a country’s inflation rate increases with its
degree of openness and that this inflationary effect is dampened by the degree of
imperfect competition.
In Chapter 2, I ask the same question of whether openness is inflationary,
but I change the imperfect competition structure from Chapter 1 so that workers
supply differentiated labor to a competitive final goods producer. This more closely
follows the theoretical story cited by much of the empirical literature on openness
and inflation. However, the interesting result in Chapter 2 is that the implications
for optimal monetary policy and real outcomes are the same as in Chapter 1. That
is, the source of the imperfect competition does not matter. Chapter 2 then goes on
to evaluate much of the empirical literature on the basis of whether it controls for
imperfect competition among goods producers and among suppliers of labor. Finally
Chapter 2 includes an empirical test of the theory. Using a sample from 1987 to
2002, the data confirm the implication of my model that increased openness can be
inflationary—a result that contradicts much of the previous empirical literature
Lastly, Chapter 3 deals with the question of how a monetary authority should
respond to foreign monetary policy. The model relaxes the assumption of rational
expectations in order to generate steady state equilibria that are neither overly
inflationary nor independent of foreign monetary policy. The resulting monetary
policy rules are well below the upper bound of money growth and are an increasing
function of the history of foreign monetary policy.

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electronic

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eng

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Copyright is held by the author. Presentation of this material on
the Libraries' web site by University Libraries, The University of Texas at Austin was made
possible under a limited license grant from the author who has retained all copyrights in
the works.

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Inflation (Finance)--Econometric models

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Monetary policy--Econometric models

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International economic relations

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dc.title

Three essays on openness, international pricing, and optimal monetary policy